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Rob Reid: Tell FCA why scrapping contingent charging is problematic

The latest consultation on defined benefit transfers underlines the perils of default positions. In effect, transferring from a DB scheme is not thought to be a good idea for most.

The key point in the consultation is the attack on contingent charging – many advisers have seen people reject sensible advice fees for a so-called free service which, in reality, is anything but.

There’s no doubt that given some of the comments around ongoing charging we all need to respond to this paper. That response needs to be offering a review of these proposals, pointing out logistical flaws and trying to get us to a point where the advice gap shrinks instead of growing exponentially.

FCA sets out contingent charging ban for DB transfers

If we now have to levy the same fee for those who are recommended to stay put as those who transfer, then those remaining in DB will be cross-subsidising those who are transferring out.

Current charges for DB transfers don’t just represent time spent, they reflect compliance costs and higher professional indemnity insurance costs. In other words, a risk premium. This paper makes it clear that merging the costs of a transfer with those of other items being advised on will not be allowed. Given DB transfers are now full and not focused advice, I am unclear how that will be disclosed and agreed without confusion and accidental breaches.

The legal profession used to take brickbats for the legal bills following a house purchase. A firm I worked with asked me how I would respond to such challenges so I redesigned their bill to emphasise who got what from the invoice i.e. who got the stamp duty and who got the fees. Suddenly clients began to understand who caused the lion’s share of the costs.

Firms need to be open with their clients on the cost of compliance, including FSCS and PII. We need to produce information like the Haynes manuals on cars with the cutaways and cross sections.

DB transfer values and activity increase during July

It is not just the FCA fees, FSCS and PII, it’s the time that compliance takes, e.g. from digesting this recent consultation paper to implementing product governance and even CPD. We do none of this for fun, we have to do it to remain professional and compliant.

I suspect many clients would give up their right to protection from FOS and FSCS if they knew the effect of compliance on costs – specifically, the impact regulation, and picking up the tab for the sector’s bandits, has on what we need to charge to maintain and invest in an advice business.

I believe with the holy trinity of Woodford, London Capital and Finance and the spiralling cost of giving advice we are at a tipping point – there’s no time to lose, we all need to respond.

Rob Reid is principal of CanScot Solutions

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Comments

There are 17 comments at the moment, we would love to hear your opinion too.

  1. William Burrows 9th August 2019 at 1:16 pm

    Brilliant – well done

  2. Very good points Rob. But the FCA really do not listen. They consult and then do pretty much what they were going to do in the first place. A failed regulator who refuse to recognise what a disastrous set of unintended consequences their well meaning regulations have created. I despair of the view that it is only professional advice if it is accompanied by bucket loads of reports and research. Their layers of rules and regulations have in some cases protected the public from miscreant advisers but have also escalated the cost of compliance so that good advice costs infinitely more to justify and document than it really needs to.

  3. I see where you are coming from, but as you may expect I don’t agree.

    You say “If we now have to levy the same fee for those who are recommended to stay put as those who transfer, then those remaining in DB will be cross-subsidising those who are transferring out.”

    Perhaps then the fees are to big in the first place? Presumably an in depth analysis should be undertaken in both cases and a cogent report outlining the reasons for the advice presented in both cases. I therefore don’t see why a ‘reasonable’ fee should not be charged in both cases.

    You also speak of the advice gap. I know I’m not alone in saying that there isn’t one. We are not social workers. We are financial advisers and therefore we deal with people with financial means. This may not be palatable to those with a highly developed social conscience, but the bottom line is that we all run (or in my case ran) a business.

    • If you only look at it from the provider’s perspective then there is never any shortage of anything, be it legal advice, accountancy services, food, healthcare or housing, you name it…

      But that rather misses the point.

      • Maybe. But if people can’t afford a lawyer (criminal cases apart – legal aid), or an accountant, an architect or what have you, is that also an advice gap? You may want or even need a new car, but if you don’t have the wherewithal you have to rely on public transport.

        Financial advice is an expensive resource and there may well be people who can’t avail themselves of the service. But in that case they may have scant resources and have to rely on other means. People with significant final salary pensions are not paupers. Those in genuine straightened circumstances need to ensure thy have life assurance on which commission is still paid and should be encouraged to save if possible. They don’t (in the main)need other types of financial advice. In other circumstances there is Citizens Advice.

        The advice gap assertion implies that advisers can afford to service the impecunious.

  4. I think there is a big problem with FCA overstepping the mark, it may have the funding of a small country but someone should remind them that they are not the UK government.(Thank God)!
    1.The 2015 Pension Freedom reforms are government policy, FCA is openly discouraging individuals from considering a transfer, without £3,500 to pay for advice they cant have it.
    Maybe it should up to government to ban DB transfers if that is they want.
    2.Are FCA exceeding their powers in their approach to this issue?
    In a nutshell they are not Consulting properly, they are making many unproven assumptions and are intervening
    in the market in a heavy handed way.
    Reading their paper i see a regulator that doesn’t really understand the issue and is making a dogs dinner of the regulation.
    They should be held to account.

    This is what FCA are supposed to do;

    Our strategic objective is to ensure that the relevant markets work well. To advance our strategic objective we have three operational objectives[3]:
    Protect consumers – to secure an appropriate degree of protection for consumers
    Protect financial markets – to protect and enhance the integrity of the UK financial system
    Promote competition – to promote effective competition in the interests of consumers

    I have to say the consultative paper is half baked and nonsense.

    The only way out of this is for PFS or some to require a judicial review of the process.

    Ultimately FCA can do what they want and get away with it, not being responsible for any outcome.
    Mumbo Jumbo regulation!

  5. Whilst I need to fully digest the FCA consultation, on the face of it, I look at it as ensuring the ‘financial reward’ for advisers saying ‘no’ is on a par with saying ‘yes’.

    Contentious view, perhaps, but trying to remove the bias (initial advice wise) is seemingly by removing a difference in receipts to the Firm if they give different answers.

    Whilst this may remove some conflicts of interest, it won’t resolve insistent clients, bad advice etc and it leaves the opportunity to ‘game’ the system using off the record discussions, UCIS etc.

    I can see that ‘no’ to transfer can likewise be gamed – whilst some disagree, it’s easier to say ‘no’ than ‘yes’ not least because the Regulator says the majority should be ‘no’ in any case however the work involved in reaching a ‘no’ is less than a ‘yes’ and therefore more profitable for firms (the FCA acknowledge this in the consultation)!

    In a world where non-advisers are advising people to invest in mini-bonds and UCIS (perhaps feeding on the public lack of clarity on advice regulation) we open the door to abridged advice – is this another crack those seeking advice can fall down?

    Whilst there are, no doubt, issues this feels hastily put together, bowing the the crowd and I can see that those who want to (which appears to be what the FCA are trying to address in part) can work around it.

    A lot has happened since the BSPS situation – CII Gold Standard, best practice being reiterated time and again by FCA, PII insurers requirements, need for PTS to be qualified to give investment advice (!) etc etc. We’re also 5 years on freedoms being announced.

    I therefore wonder whether current data suggests issues remain or whether this is retrospective and based on a (almost) unique set of circumstances late 2017/early 2018 where a large Scheme effectively put a gun to it’s members heads and asked them… what do you want, A, B or C and, IMO, left them floundering.

  6. The trouble with different levels of charging depending on whether the advice is to transfer or stay put is that if the former is higher than the latter, there’ll always be a conflict of interest which, as we know, some manage decidedly less well than others. There’s no getting round it.

    Perhaps the FCA needs to go back to Old Kent Road and rethink this whole area of advice and how much is charged for it. A good place to start (IMHO) might be the provision of guidance by way of a factual (not client-specific) comparison of the good points and the bad points (risks) of either course of action.

    Of course, this wouldn’t be perfect because a very large CETV might well generate a very modest rate of investment growth required to produce potentially superior benefits, with the added attraction of a (hopefully still) large fund returnable on early death. But it might at least be a cost-effective starting point.

  7. David Bashforth 9th August 2019 at 4:47 pm

    As a firm with four partners all aged below 45 we are beginning to wonder whether we will still have a viable business if something is not done about the FCA riding roughshod over advisers. Enough is enough, we need to coalesce, perhaps behind our professional body and demand change.

  8. Richard Anderson 9th August 2019 at 4:47 pm

    I feel that many are missing the point on DB transfer advice, and I agree that contingent charging should go. We cannot afford to advise clients to stay in their scheme and to do that for free. It is unfair to only charge those who transfer, aside form the arguments about it creating conflicts of interest and bias.

    By advising a client to remain in the scheme we are still providing advice, i.e. we can still get sued if we get it wrong. The client is paying for our assessment and professional advice, whether it is to stay or go, and each outcome should be charged for. the big problem is actually that many scheme members have no means of paying a £5k bill for a report that says ‘I recommend you remain in your DB scheme’.

    IMHO the process of advising on a DB pension is about assessing what the client is on line to receive from the DB scheme and comparing this to what they might expect from a transfer. The nature and shape of the two schemes is very different, and transfers will be right for some clients even if they may receive slightly less. Our job is to distinguish which type of scheme is best for the individual client.

    We are also in danger of removing choice. Some clients prefer ownership of a fund to ownership of an IOU. I fully appreciate that the regulator has a tough job, but all scheme members should be able to transfer out if they wish. Suitability is subjective. The state should not tell me that I cannot part exchange my car for a motorcycle.

  9. I think there is a big problem with FCA overstepping the mark, it may have the funding of a small country but someone should remind them that they are not the UK government.(Thank God)!
    1.The 2015 Pension Freedom reforms are government policy, FCA is openly discouraging individuals from considering a transfer, without £3,500 to pay for advice they cant have it.
    Maybe it should up to government to ban DB transfers if that is they want.
    2.Are FCA exceeding their powers in their approach to this issue?
    In a nutshell they are not Consulting properly, they are making many unproven assumptions and are intervening
    in the market in a heavy handed way.
    Reading their paper i see a regulator that doesn’t really understand the issue and is making a dogs dinner of the regulation.
    They should be held to account.
    This is what FCA are supposed to do;
    Our strategic objective is to ensure that the relevant markets work well. To advance our strategic objective we have three operational objectives[3]:
    Protect consumers – to secure an appropriate degree of protection for consumers
    Protect financial markets – to protect and enhance the integrity of the UK financial system
    Promote competition – to promote effective competition in the interests of consumers
    I have to say the consultative paper is half baked and nonsense.
    The only way out of this is for PFS or some to require a judicial review of the process.
    Ultimately FCA can do what they want and get away with it, not being responsible for any outcome.
    Mumbo Jumbo regulation!

  10. The absurdity in all this is that it is, or should be, up to the individual to decide what risks to run. Good advice in this area should be about empowering the client to make an informed choice, not telling him or her what to do.

    A true professional would do the analysis and say to the client “if I were you, I would do X not Y, but of course I am not you, and you must decide.”

    That professional would also agree to facilitate the client choice, unless he or she thought the client’s choice was plainly not in their best interest, in which case he or she would refuse to proceed.

    Heaven knows how the regulations would cope with this approach. My guess is that if the client chose Y and it went wrong for whatever reason the adviser would be in the dock. Madness.

    I can’t even remember his name, but I paid an actuary a fat fee for a telephone conversation getting on for 20 years ago. He boiled it down to who took the risk, me or the scheme.

    Best money I ever spent. But could this happen today?

    • “Good advice in this area should be about empowering the client to make an informed choice, not telling him or her what to do.”

      Absolutely spot on.That is precisely what I attempted to do.

  11. The premise seems to be that because the majority of people who have sought advice, have been advised to transfer, and as transferring is not good for the majority of people – this MUST mean there is a problem.

    I love your motorbike analogy Richard Anderson, as a motorcyclist myself (sometimes) and a car driver (sometimes). Most people agree that motorcycles are dangerous machines, and the result of a crash on a motorcycle is usually far more serious than a crash in a car.

    I am therefore offering a study and consultation, on how to reduce deaths of motorcyclists – and looking for feedback.

    I have already noticed that most of the people who go out to buy motorcycles are helped to buy one, with a resultant profit to the seller. People who have no interest in buying a motorcycle (or use for one) tend not to visit the showrooms, so those people are not included in my numbers. Most motorcycle sellers have an interest in making sure their customers do not crash, and will offer safety equipment, and access to ongoing training to help protect them, but I am putting this down to the fact that they simply want to make more profit.

    I have worked out that far Less motorcycles would be sold if the showrooms charged potential customers. A sensible fee would be around £3-5,000 for each viewing.

    I have done a spreadsheet that shows that after a year or so, that there would be significantly less motorcycle deaths, and I could claim that my study has helped to improve motorcycle safety dramatically.

    I have had a few objections from motorcycle sellers that their businesses would no longer be viable, but they are few and far between.

    A few people have said that motorcycles cause less pollution, and less congestion but these areas could be subjects for my next consultation, once I have eradicated the evils of motorcycles…..I have to make a living you know!

  12. Apart from the fact that only clients with relatively substantial free assets are likely to be able or willing to pay a non-contingent fee of several thousand pounds (£5k seems a bit high) for a full analysis of their options, whatever its concluding recommendation may turn out to be, the tricky point is that, for the adviser, the risks and costs going forward will be considerably higher if the final outcome is a transfer.

    The problem seems to be the FCA’s reluctance to allow a multi-stage process. Would it not be both practical and logical to start with pro’s and con’s guidance (basic fee), follow that with triage to establish potential suitability to transfer (a further fee) and conclude with a third fee for a full report to arrive at a firm recommendation one way or another? At each stage it would be impressed upon the client that the recommendation may well be to stay put and that he can withdraw from the process at any time.

    Stage one ~ the client can decide whether or not the complexities and risks of transferring are for him and whether he wishes to proceed to Stage two.

    Stage two ~ transferring might be viable/suitable but the client can decide whether he wishes to incur the further costs of proceeding to Stage three.

    Stage three ~ the concluding recommendation may be to stay put, so the client may feel that he’s wasted his money.

    But, surely, is this not in line with the FCA’s requirement that clients should be given sufficient information to reach a properly informed decision?

  13. Surely the solution is obvious. Both schemes (old or new)should be able to pay the cost in either event (which should be the same figure regardless of the answer) by a reduction to the pension benefits being offered, perhaps with a maximum cap overall to ensure really excessive charging is combatted. The current solution is poor as the FCA has decided to attack a conflict of interest by effectively saying if you have no money outside of the pension you aren’t allowed it.

    Change the law to say funding from the DB scheme is compulsory by all schemes(assuming we are able to pass any realistic law changes to anything ever again whilst trapped in the Brexit loop).

    • I don’t think the FCA is saying that if you have no money outside of the pension you aren’t allowed to commission an analysis of your options. Rather, I think, their position (with which I happen to agree) is that if your entire retirement benefits provisions are vested in just one (DB) pension scheme (and your life expectancy is not impaired), the risks of transferring their entire value to a money purchase arrangement are almost certainly inappropriate.

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